3 Companies With Stellar Acquisition Records

Effective capital allocation is a critical skill for any management team. But how can an investor judge a company's ability in this area?

In this video clip from "The 5," recorded on Nov. 9, Fool.com contributors Trevor Jennewine, Zane Fracek, and Demitri Kalogeropoulos discuss how Constellation Brands (STZ -0.04%), Teladoc (TDOC -0.07%), and Roku (ROKU 0.15%) have made strong acquisition moves in recent years.

Trevor Jennewine: Let's talk about spin-offs and mergers and acquisitions. When you think about those types of deals that have taken place over the last few years, name one that stands out and you can be for good reasons or bad reasons and discuss the deal and the impact it had. Demitri, let's start with you.

Demitri Kalogeropoulos: Let me share my screen for a second. That's a cool question. The one that jumped into my head when I was thinking about this as a game-changing acquisition was 2012 purchase, and that accompany calling the Constellation Brands and the ticker symbol is STZ, and you might be aware of them. They sell alcoholic beverages and beers.

Let's see if I can get this up. But what we've got here is the operating margin. Since that purchase in 2013, they spent about thee billion dollars buying the US rights to Mexican imported beers from Anheuser-Busch, which is Corona, Modelo, and Pacifico. Since then, as you saw their margins, they were primarily just a wine and spirits company before that, and around then I don't know if we're following alcoholic beverages, craft beers for really the thing that everyone was drinking.

But then that changed, and it all shifted the money went into these premium imports and Constellation Brands just had an amazing six or eight years following that. The company is still making really good bold purchases like that.

I'm impressed with the management, capital allocation skills. They've got a big ownership in Canopy Growth, the recreational marijuana market. They're really aiming to make a big push in that. They've been spending a lot of cash in upgrading their Mexican brewing network so that they can satisfy demand and get those margins continuing to go higher over time.

That's one stock I think that investors might want to keep on their watch list if they're looking for exposure to the alcoholic beverage industry, and if you like a management team that have a good track record for allocating capital.

Zane Fracek: Pivoting hard from alcoholic beverages to healthcare, in acquisition, I thought it was pretty interesting in the past year. Was the $18.5 billion acquisition of Livongo by Teladoc. This was August of last year of 2020. I think that helps them, helps Teladoc become the player to watch in healthcare in general, honestly.

I think we're going to be looking at a transformed healthcare landscape where it's going to include telehealth and wearables, so combining the two, I think just made sense and they were able to find a lot of synergies. Amazon and Apple have talked about competing in healthcare for a long time and both of those companies would pretty easily, I think, be able to do something like that, so it's good to see Teladoc making a strong move and trying to capture more market share.

They've a string of earnings misses recently until they beat expectations last quarter by 20%. But that said, I still think the merger made sense and they're doing pretty well. Most of that's from cross-selling. Basically, you're bringing people onto this platform, they have tens of millions of users, and a lot of them are going to have chronic diseases or things that need treated and Livongo is helping that.

They have a mental health product, they have a huge diabetes market, so bringing that in is really powerful for Teladoc. Their business model basically relies on access fees and visit fees. It boils down to meeting people on the platform, but I think they're growing. They maintained strong cash position since the acquisition, and there's still approaching profitability. Their Q3 sales grew 80% from 2020 and their organic revenue, this is excluding revenue from the acquisition was 32 percent in that time.

Management commented on this as well, saying that their recent access fee growth is from Livongo's direct-to-consumer mental health offering that I touched on, and they think synergies will be bringing together chronic disease treatments and the telehealth provider. Consumers are really needing the products and the telehealth visits, so being able to offer both and cross-sell is a main benefit. I think has treated them pretty well.

Jennewine: Thanks. I think that was a good move too for Teladoc. I think maybe Livongo's shareholders were a little disappointed to see the company disappeared. But I think it really reinforced Teladoc since the advantage in that virtual care market, like you said, and like you also touched on the synergies, they're rolling out their primary care offering.

I think they can refer patients into those chronic care programs. I think it makes a lot of sense, definitely see a bright future for that company.

One of the acquisitions that stands out in my mind, maybe a little bit less important than the two you guys talked about, but back in 2019, Roku acquired Data Zoo. Data Zoo was a demand side platform similar to The Trade Desk.

Essentially, it helps marketers and advertisers build targeted campaigns, measure the results, and optimize performance. This makes a lot of sense. Roku is the leading streaming platform in terms of CTV viewing time. The company had 31 percent market share in the third quarter of 2021.

The next closest competitor was Amazon with 17% market share, and so bringing Data Zoo into the full really helped Roku accelerate the growth of its digital ad business. The company rebranded as Roku OneView and integrated its own first-party data to help marketers reach the appropriate audience. OneView now reaches four out of five homes in the US, and that's across mobile desktop connected TVs.

I think Roku's seen a lot of benefit since the acquisition and I think that it's going to help them continue to monetize their ad supported service, the Roku channel. I think there's still a bright future for that company too.